Globalization in the world, initiated production to accounting from different regions. Most of the production has been pursued in the underdeveloped and developed countries of the world. Thus, it arise the need of the fair value measurement. The fair value phenomenon is known as the price to sell a product or transaction for a liability for the market participants. The measurement of such fair pricing by date and cost is known as fair value measurement of the product or service.
Thus, financial reporting plays a significant role in evaluating the fair values of the product in the developing countries. Advance finance reporting requires the application of fair value accounting on different scales to analyze financial instruments, market turmoil, control processes, risk management and fair value measurement. The fair value measurements are required to be analyzed and evaluated by the help of external auditors.
External audits the FVM is a challenging aspect. It is mainly because of the type of audits are carried out by external auditors having professional judgment and other qualitative features arranged by the management. Their format of carrying audits tends to develop gap in between the standards of professionals working in different field. Therefore, there are certain challenges that can be faced by the external auditors during fair value measurement and auditing standard- settings. The major three factor that may include are:
1.Gain and Loss Reserves:
The major challenge that has been faced by the external auditor is regarding to accessing the values for the assets. The problem is caused because of the severe conditions that are raised because of the lacking of insufficient, regulated, and inactive market. The market hereby includes evaluating the assets of the firm and distant market shares however on the other hand it is complete inactive and inefficient. Such unprofessionalism and inefficiency causes the naïve investors to fall in the rumors trap and buy the firm shares at overstated prices without studying the markets. This tends to make the market of the firm’s ups and down in stock exchange.
2.Market Liquidity:
Market liquidity is stated as the assets which are easily convertible into cash. The assets including stocks and bonds are known to be liquid because they are convertible within two working days. Whereas huge assets like property, plant to equipment’s are highly difficult to convert into cash. Therefore, cash is considered as an effective source of transferability and liquidity. It possess a great challenge to external auditor to audit to count these assets and make a financial report about them on urgent basis. Other than that the firm’s assets can also be change into forms that may pose a great deal of difficulty for an auditor to audit.
3.Assessing Asset and Goodwill Values:
Some business or firms work for years having high prices for their product and services with poor quality. However, due to loses or any other format of risk the company then is overtaken by another giants. The other business may purchase it on higher prices or stakes. That may help the company stakes to grow. The stakeholders of the smaller company may maintain goodwill relationship with the giants company. On the other hand they may fool the external auditors with previous shareholding price creating disruption in the process.
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